Is it Time to Exit Munis?

I went into munis big time a year ago when rates spiked. Now it may be the time to rotate out. Comments for readers would be welcome! Here is the logic:

Muni yields drop to ten-week low, and yet the yield curve today is at record steepness. The long bond seems destined for over 5%, and we now see projections of 6% (from Citi). The Fed is unwinding QE in Treasuries, which makes higher rates likely in 2010; will this also drive muni rates back up? Past history says the yield curve gets even steeper until about 18 months after a recession ends. Assuming we ended in Q3, this targets higher rates into 2011.

Sure, there are some distressed bond States, such as NY and California, but this question is not about the potential failure of muni’s to pay. At the top in 2000, dot-coms cut everything back except their lifeblood, their web sites. (Exodus was a short waiting to happen, since it was the beneficiary of those walking-dead websites, until they finally had to turn off the lights, and then Exodus crashed too.) In the coming ’10s, States will do everything to cut back except their lifeblood, the muni bond market.

Right now money flowing into munis is slowing. This might just be year-end tax planning, with a new surge in January. Or it may signal a change of trend.

Duncan is an advisor to NetService Ventures, where he focuses on digital media and the mobile Internet.

Previously he was at four start-ups: Xumii, a mobile social service based on a Social Addressbook; SkyPilot Networks, the performance leader of wireless mesh systems for last-mile access, where he was the founding CEO; Covad Communications (Amex: DVW, $9B market cap at the peak), the leading independent DSL access provider, where he was the founding Chairman; InterTrust Technologies ($9B market cap at the peak), the pioneer in digital rights management technologies, now owned by Sony and Philips, where he was SVP Business Development and the pitchman for the IPO.

Before these ventures, Duncan was a partner at Cambridge Venture Partners, an early-stage venture firm, and managing partner of Gemini McKenna, a joint venture between Regis McKenna's marketing firm and Gemini Consulting, the global management consulting arm of Cap Gemini.

He serves on the board or is an adviser to Aggregate Knowledge (content discovery), Livescribe (digital pen), AllVoices (citizen journalism), Xumii (mobile social addressbook), Verismo (Internet settop box), and Widevine (DRM for IPTV).